Copyright Statement

Abstract

Begin with a handful of simple propositions.

Tax reform is a political exercise. Like any policy, decisions about the tax system
are made through ordinary political processes and are victim to ordinary political
forces. So while (we) public economists are inclined to think of tax system design
as an essentially technical exercise, a little like "dentistry" (as Keynes hoped
macro-economic "management" might become), in fact the purely political
element is ineluctable and central. Perhaps, given the fate of the super-profits tax
recommendation, this observation is hardly news; but public economics (especially
in its tax reform advocacy aspect) has not been keen to recognise the fact or to
include the political element explicitly in its models. That is one respect in which
the "constitutional political economy tradition" associated with James Buchanan
and his colleagues (among whom we number ourselves) is somewhat distinctive:
in that tradition, public finance and democratic process are fellow-travellers!

Tax reform is also a (small c-) constitutional exercise. If we think of the (small c)
constitution less in terms of written documents and more as the set of the rules of
the game by which a political society operates, then the tax system constitutes an
important part of those rules. The tax system sets the frame within which people
make their private market decisions (a bit like the property rights structure); and it
sets the terms on the basis of which citizens make their collective decisions -
specifically, by determining how the costs of public spending (both actual and
potential) are shared among different groups of citizens. Both dimensions of this
framing are important. Orthodox public economics focuses all its attention on the
former; constitutional political economy (CPE henceforth) directs attention to
both. One way of putting the point is in terms of a "two margins" approach. One
margin deals with the relation within the set of private goods -between say wine
and orange juice; or current and future consumption. The other margin involves
the choice between public and private expenditures. Politics enters these two
domains of choice in slightly different ways. It enters the first because the tax
policies that bear on "private-private" margins of choice are politically determined.
But the choice itself among private goods is exercised through markets. The
private-public margin of choice is, by contrast, directly mediated through politics.
Quasi-constitutional elements arise in relation to both dimensions.

The political and the constitutional aspects of tax reform are in some tension.
From the constitutional viewpoint, politics is part of the problem. But by necessity,
politics is - and has fo be - part of the solution. Juggling that paradox is a central
feature of any tax reform exercise. Here, basically, we aim to explore, against the
background of the Henry Review, something of what that juggling exercise
involves.

In what follows, we shall seek to expose the political element first by recalling
a similar exercise in tax reform in Australia's not-too-distant past. That will
occupy us in Remember the alamo!. In The invisible second margin, we shall take up
the "two margins" issue and attempt to explain something of what is involved in
the contrast. This explanation will also help to clarify one aspect of the
"constitutional" status of the tax system. In The case for stability, we shall
emphasise another aspect of the tax system's quasi-constitutional status- namely,
the general presumption in favour of stability. Tax reform: who needs it? and
Non-barking dogs set against that presumption the various possible rationales for
tax reform and test their relevance in the current climate. In Tax reform: who needs
it?, we consider the Henry Review's apparent rationale and some of its
implications. In Non-barking dogs, we consider some other, more or less familiar,
arguments that the Henry Review seems to neglect. In System, system, system and
Upholding the quasi-constitutional status we examine several aspects of the Henry
Tax Reform exercise against the criteria that the CPE approach suggests: first, the
"smorgasbord" approach to recommendations that the Review Panel seems to
have adopted (System, system, system); and second, the choice of the incumbent
Secretary of the Treasury as the Chair of the Review Panel (Upholding the
quasi-constitutional status). Institution-making discusses briefly the Report's
recommendations concerning the institutionalisation of tax reform; and Conclusion
offers some summary conclusions.